The Week In Muniland

The market rally took a bit of a breather last week, with yields rising across the curve. As expected, volatility remained a theme as the fixed-income markets attempted to digest the barrage of policy-related headlines. For the week, two-, 10- and 30-year AAA municipal yields rose 2, 10 and 12 basis points (bps), respectively. The Bloomberg Municipal Bond Index (Index) returned -0.52% last week and has returned 0.97% year to date.

• Why it matters: In addition to the broader volatility in the fixed-income markets, the muni market did modestly underperform on a relative basis, with after-tax spreads widening (albeit modestly) over the week. As we mentioned last week, this is not entirely unexpected, as March historically has been a challenging month for the municipal market. While supply has been heavy, demand for municipals has helped offset some of that issuance. Investors added $872 million to the market last week, marking the seventh consecutive positive week, according to Lipper. As has been a theme all year, inflows were relatively concentrated in longer duration and high-yield funds. Year to date, HY fund flows total $4.1 billion (44% of overall municipal fund flows this year), while HY funds compromise roughly 26% of municipal fund assets. Credit has outperformed this year, with the Bloomberg Municipal High Yield Index returning 1.57% compared to the investment-grade index (Index) return of 0.97%.

The US economy added 151K jobs in February, roughly in line with expectations and recent averages.

• Why it matters: Under the hood, the unemployment rate ticked up (marginally) to 4.1%, and wages are up 4.0% over the last 12 months—but both are well within recent ranges. As such, we do not think there is anything in this report that changes the fundamental picture or creates any near-term policy ramifications. The labor market has seemingly settled into equilibrium, and this data supports that. Over the last year, the labor market has added, on average, 162K jobs. It bottomed out last summer (when the Fed began cutting rates), but then rebounded higher toward year-end—but there has been a significant amount of monthly volatility. After ending 2024 stronger, the labor market in 1Q this year has been softer. Given the volatility in the data—particularly around year-end—it is best to focus on the medium term. Through that lens, the trend is sideways. The same is true for the unemployment rate, which has been between 3.9% and 4.2% for more than a year.

The municipal yield curve remains steep, providing an attractive opportunity for investors.

• Why it matters: As we have mentioned previously, the year 2024 saw a massive steepening of the yield curve, and investors who implemented a barbell maturity structure were certainly rewarded. The muni curve has continued to gain even more curvature this year, with both the 2s30s and 10s30s curves widening 41 and 25 bps, respectively. The muni curve is nearly six times as steep as the UST curve, after tax (Display 1). As the slope of the curve increases, it improves the roll return for longer maturity bonds. In addition, longer maturity ratios are most attractive relative to short and intermediate maturities. Continued support from strong investor demand should provide an additional tailwind to longer-dated bonds.